Most of the students (including me) at Carnegie Mellon will be framing IT Strategy for leading organizations of the world very soon. My first blog is a continuation of the blog that I wrote for Prof. Zak’s Supply Chain class (http://cmuscm.blogspot.com/2014/02/business-justifications-for-migrating.html). Before joining CMU I worked with Accenture for 6 years. During my tenure at Accenture I got an opportunity to be a part of teams that were responsible for framing and implementing IT Strategies for various organizations. It was interesting to see how organizations were pushing to move towards the cloud (even though they had no immediate benefit) as their competitors were also doing the same. The previous blog was mostly about migration of On-Premise SCM ERP to the cloud but this blog will focus primarily on the factors that are leading to shape the strategy for consolidation of IT infrastructures (All modules – primarily on the enterprise applications side) across industries around the world. I choose this topic because it’s a perfect mix of all the reading assigned for the Strategy Development class this week. This article tells us:
- How External Strategic Environment is changing the Industry dynamics (in our case it is primarily SAP was pushed to buy Success Factors for an exorbitant amount)
- How futuristic IT innovations are changing strategic policies of organizations (in our case it is migration from On Premise to cloud)
- Competitor Analysis & Cloud Wars (in our case SAP vs Salesforce)
External Strategic Environment is changing the Industry dynamics
IT System (ERP) is the backbone of any successful organization. Companies invest heavily on implementing, supporting and upgrading their IT (ERP) systems. Since their inception in early 1970’s majority of the ERP systems were implemented on premise. On premise ERP also known as traditional ERP have a proven track record. Over the last 4 decades ERP has matured providing robust system functionality and provide various kinds of benefits such as greater degree of customization and integration that is much needed by any organization to run the system in the way they want according to their needs. Over the last decade non ERP applications have shifted to the cloud computing and have experienced a tremendous growth. Cloud computing is the “IN” thing right now and showcases us the future generation application architecture. It is growing leaps and bounds due to the distributed nature of the internet and related technologies, combined with advances in hardware virtualization, and modern—more flexible—software architectures.
Report published by CRM switch in 2013 clearly shows that in the ERP segment companies have started preferring cloud based ERP over traditional ERP systems, Currently in US around 60% of the companies (especially small and medium scale) use cloud based ERP whereas this share was just 15% in 2010. (See Exhibit below)
Until recently SAP was the leader in ERP segment with very few competitors to fear from, they initially dismissed the concept that cloud will ever be able to overtake on-premise solution, but with invent of cloud based ERP solutions and their of late popularity with leading organizations (classic example is Salesforce) SAP was forced to venture into this segment inorganically by acquiring cloud based solutions such as Success factors (HR segment) and Ariba (Procurement segment)
Futuristic IT innovations are changing strategic policies of organizations
As discussed in the above point that SAP had to chain their business strategy in order to cater to the market trends and tech innovations. Some of the key factors that were driving factors in changing the strategic policies of the organizations were:
ü Huge impact on the TCO (Total cost of ownership): As an amateur people might think that Application Software cost is the key deciding factor when a decision regarding an ERP implementation is made, but that’s is not the case. Other key factors that should be taken into account while calculating Net Present Value (NPV) of the project are IT Resources, Consulting, Training, Hardware and Infrastructure Software. Cloud based SaaS ERP is cost effective in all the areas except for the cost of Application Software and in that also differential amount is not that much. We can see that over a period of 5 years cloud based ERP can provide an additional savings of almost 50% and if we look beyond a 5 year plan we can say that this additional savings can be invested in process improvement and can result in longer-term benefits.
ü Muti-tenancy, Sharing and community effect: The world (especially the corporate world) is very mean, everything boils down to money. Cloud computing has made multi-tenancy (or sharing) possible and it brings tremendous cost savings to software vendors through this migration. Besides this in this competitive world if majority of the people start implementing something and even if an organization is doing fine and doesn’t really need an upgrade they still go for up gradation so that they don’t lag behind in anything and I agree with this point that they should do the same. Besides that a lot of startup companies are providing module wise cloud based solutions which are really being liked by the companies and they have really given run for money to traditional mega ERP companies
ü Speed, functional coverage and ease: Speed to deliver, ease of use and access via any device, anywhere is one of the business justifications as work is getting more and more distributed and people are working together on the same application from around the globe. Besides that cloud based ERP uses same code and credentials as on premise ERP and offer faster implementation.
Competitor Analysis & Cloud Wars
None of the leading ERP companies thought that cloud computing will lead to such a massive change in their organization’s strategies. New players took over the market by surprise. But do you think companies like SAP, Oracle or Microsoft will stay quiet? The answer is NO.
- They have ample of cash (and have all the capabilities to acquire cloud based startups inorganically)
- They have detailed ERP coverage across all the modules (Salesforce – that has only CRM capability as of now)
- They have strong workforce and excellent strategic ties with their partners that will not let them go so easily.
New Players in the ERP Market – Front runners in the cloud based ERP solutions
Old players in the ERP Market – Traditional ERP strong hold – Catchign up in the cloud based solutions
Distributive Strategy in the IT space (Will write a blog very soon)
This will deal with organizations strategy to distribute work into various vendors (rather than being completely dependent on one) – e.g. Salesforce for CRM applications / SAP for SCM applications / NetSuite for Finance etc.
Scenario 1Scenario 2